SEC News Digest

Issue 2009-37
February 26, 2009

RULES AND RELATED MATTERS

Application for Registration as a National Securities Exchange Under Section 6 of the Securities Exchange Act of 1934

The Commission has published for public comment C2 Options Exchange, Incorporated's application (File No. 10-191) for registration as a national securities exchange under Section 6 of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of March 2, 2009. (Rel. 34-59441)

ENFORCEMENT PROCEEDINGS

In the Matter of Martin A. Armstrong

An Administrative Law Judge issued an Initial Decision barring Martin A. Armstrong from association with any investment adviser. The Initial Decision finds that, on Aug. 17, 2006, Armstrong pled guilty to one count of conspiracy to commit securities fraud, commodities fraud, and wire fraud in violation of 18 U.S.C. Section 371, and, on April 10, 2007, he was sentenced to sixty months imprisonment and ordered to pay $80,000,001 in restitution. United States v. Armstrong, No. 99-CR-00997-JFK (S.D.N.Y.). Additionally, The Initial Decision finds that, on July 22, 2008, a Final Consent Judgment was entered against Armstrong, permanently enjoining him from future violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. SEC v. Princeton Econ. Int'l Ltd., No. 99-CV-09667-PKC (S.D.N.Y.). (Initial Decision 372; File No. 3-13121)

In the Matter of WealthWise, LLC and Jeffrey A. Forrest

On February 25, the Commission issued an Order Instituting Administrative Proceedings Pursuant to Section 15(b) of the Securities Exchange Act of 1934 and Sections 203(e) and 203(f) of the Investment Advisers Act of 1940, and Notice of Hearing (Order) against WealthWise, LLC (WealthWise), a registered investment adviser based in San Luis Obispo, California, and Jeffrey A. Forrest (Forrest), its owner and principal, based on the entry of a permanent injunction against WealthWise and Forrest in the civil action entitled SEC v. WealthWise, LLC, et al., Civil Action No. 2:08-cv-06278-GAF-SS, in the U.S. District Court for the Central District of California.

In the Order, the Division of Enforcement alleges that on Feb. 4, 2009, the U.S. District Court for the Central District of California entered a Judgment of Permanent Injunction by consents against WealthWise and Forrest, permanently enjoining WealthWise and Forrest from violating Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940.

The Division of Enforcement further alleges in the Order that the Commission's complaint in the civil action alleges that, among other things, from April 2005 to October 2006, Forrest recommended that more than 60 of their clients invest approximately $40 million in Apex Equity Options Fund, a hedge fund managed by Salt Lake City-based Thompson Consulting, Inc. (TCI). According to the complaint in the civil action, WealthWise and Forrest failed to disclose a side agreement in which WealthWise received a portion of the performance fee that Apex paid TCI for all WealthWise assets invested in the hedge fund. From April 2005 to September 2007, WealthWise received $388,401.80 in performance fees from TCI. Apex collapsed in August 2007, and WealthWise clients lost nearly all of the money they invested. For a portion of the time in which Forrest engaged in the conduct underlying the complaint, he was associated with a registered broker-dealer.

A hearing will be scheduled before an administrative law judge to determine whether the allegations contained in the Order are true, to provide WealthWise and Forrest an opportunity to dispute the allegations, and to determine what, if any, remedial action is appropriate and in the public interest, pursuant to Section 15(b) of the Securities Exchange Act of 1934 and Sections 203(e) and 203(f) of the Investment Advisers Act of 1940.

The Order directed that an Administrative Law Judge shall issue an initial decision no later than 210 days from the date of service of the Order, pursuant to Rule 360(a)(2) of the Commission's Rules of Practice. (Rels. 34-59456; IA-2846; File No. 3-13381)

In the Matter of Ross Owen Haugen

On February 26, the Commission issued an Order Instituting Administrative Proceedings Pursuant to Section 15(b) of the Securities Exchange Act of 1934 (Exchange Act) and Section 203(f) of the Investment Advisers Act of 1940 (Advisers Act), Making Findings, and Imposing Remedial Sanctions against Ross Owen Haugen (Haugen), (Order). The Order finds that on Feb. 5, 2009, an order of permanent injunction was entered against Haugen, permanently enjoining him from future violations of Section 17(a) of the Securities Act of 1933 and Sections 10(b) and 15(c) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The civil action is entitled SEC v. Ross Owen Haugen, Civil Action Number 1:09-CV-0129-ODE, in the United States District Court for the Northern District of Georgia, Atlanta Division.

Based upon the above, the Order bars Haugen from association with any broker-dealer or investment adviser. Haugen consented to the issuance of the Order without admitting or denying any of the findings, except as to the entry of the permanent injunction. (Rel. 34-59458; IA- 2847; File No. 3-13382)

SEC Charges Two New York Residents for Misappropriating More Than $500 Million in Investment Scheme

On February 25, the Commission took emergency action and obtained an asset freeze against two New York residents and their three affiliated entities, who orchestrated a brazen investment fraud involving the misappropriation of as much as $554 million in investor assets.

The SEC alleges that Paul Greenwood and Stephen Walsh promised investors that their money would be invested in a stock index arbitrage strategy. Instead, Greenwood and Walsh essentially treated their clients' investments as their personal piggy bank to purchase multi-million dollar homes, a horse farm and horses, luxury cars, and rare collectibles such as Steiff teddy bears. The SEC has obtained an emergency court order freezing the assets of Greenwood and Walsh as well as their companies: WG Trading Investors, L.P. (WGTI), which is an unregistered investment vehicle; WG Trading Company, Limited Partnership (WGTC), which is a registered broker-dealer located in Greenwich, Conn.; and Westridge Capital Management, Inc. (Westridge), which is a registered investment adviser located in Santa Barbara, Calif.

According to the SEC's complaint, filed in federal court in Manhattan, the SEC alleges that Greenwood and Walsh have been orchestrating the fraudulent investment scheme through their affiliated entities since at least 1996. The SEC alleges that they solicited a number of institutional investors, including educational institutions and public pension and retirement plans, by promising to invest their money in an "enhanced equity index" strategy that involves purchasing and selling equity index futures and engaging in equity index arbitrage trading. However, Greenwood and Walsh have been misappropriating hundreds of millions of dollars of investor funds for their personal use instead of investing the money in the enhanced equity index strategy. In fact, Greenwood and Walsh misappropriated as much as $554 million of the $667 million that Westridge clients invested in WGTI. Greenwood and Walsh have provided some of the investors' money to their spouse and ex-spouse, respectively, who are also named as relief defendants in the SEC's complaint.

The SEC's complaint charges violations of the anti-fraud provisions of the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940. Judge George B. Daniels of the U.S. District Court for the Southern District of New York entered an order temporarily restraining the defendants, freezing their assets, and ordering accountings and approving the appointment of a receiver over WGTI, WGTC and Westridge. The SEC's complaint also seeks a final judgment permanently enjoining the defendants from future violations of the federal securities laws and ordering them to pay financial penalties and disgorge ill-gotten gains with prejudgment interest.

The U.S. Attorney's Office (USAO) for the Southern District of New York announced parallel criminal charges against Greenwood and Walsh earlier today, and the U.S. Commodity Futures Trading Commission (CFTC) filed related charges against Greenwood, Walsh and their affiliated entities.

The SEC's investigation is ongoing. The SEC acknowledges the assistance and cooperation of the USAO, the Federal Bureau of Investigation, the CFTC and the National Futures Association. [SEC v. WG Trading Investors, L.P., et al., Civil Action No. 09-1750 (SDNY)] (LR-20912)

On February 25, the Commission charged Mark Bloom and his firm North Hills Management LLC with securities fraud, and obtained an emergency court order to freeze their assets and halt an alleged investment scheme involving the marketing of a "fund of funds" investment vehicle.

According to the SEC's complaint, filed in federal court in Manhattan, the SEC alleges that Bloom, through North Hills, raised approximately $30 million from 40 to 50 investors between 2001 and 2007 by representing that the assets would be invested in a diverse group of hedge funds. Instead, Bloom misappropriated more than $13.2 million of investor funds to furnish a lavish lifestyle that included the purchase of luxury homes, cars and boats for himself and his wife, who is named as a relief defendant. The remaining funds were invested in a single fund which itself turned out to be fraudulent.

The SEC alleges that the defendants solicited investments in North Hills, L.P. (Fund), which is named as a relief defendant, by making misleading representations. Bloom and North Hills represented that the Fund's assets would be allocated across multiple funds and fund managers to ensure diversification and moderate risk. They sent investors false monthly account statements that portrayed their investments as profitable when, in reality, Bloom was systematically looting the Fund's trading account by making "loans" to himself and by investing in contravention of the Fund's stated investment strategy in an investment known as the Philadelphia Alternative Asset Fund (PAAF). Bloom received undisclosed commissions from PAAF in excess of $355,000 over a 16-month period. PAAF itself was uncovered as a fraudulent scheme in June 2005.

According to the SEC's complaint, beginning in November 2007, one of the Fund's largest investors, a charitable trust (Trust) that funds children's schools began to serve Bloom with redemption requests, which Bloom repeatedly evaded. To date, Bloom has failed to honor the Trust's redemption requests in full and claims that he does not have the means to do so. The Trust is owed more than $9.5 million on its investment.

The SEC complaint charges violations of the anti-fraud provisions of the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940.

Judge John G. Koeltl of the U.S. District Court for the Southern District of New York, entered an order temporarily restraining the defendants, freezing their assets, ordering accountings, and approving the appointment of a receiver. The SEC's complaint also seeks a final judgment permanently enjoining the defendants from future violations of the federal securities laws and ordering them to pay financial penalties and disgorge ill-gotten gains with prejudgment interest.

The U.S. Attorney's Office (USAO) for the Southern District of New York announced parallel criminal charges against Bloom earlier today, and the U.S. Commodity Futures Trading Commission (CFTC) filed related charges against Bloom and North Hills.

The SEC's investigation is ongoing. The Commission acknowledges the assistance and cooperation of the USAO, the Federal Bureau of Investigation, the CFTC and the National Futures Association. [SEC v. North Hills Management LLC, et al., Civil Action No. 09-1746 (SDNY)] (LR-20913)

Minnesota District Court Issues Final Judgment Against James T. Anderson in Insider Trading and False Disclosure Case

The Commission announced that on Feb. 17, 2009, the Honorable James M. Rosenbaum, U.S. District Court for the District of Minnesota, entered a Final Judgment against James T. Anderson, the co-founder and former CEO of Zomax, Inc. The Commission's complaint, which was filed on June 6, 2005, alleged that Anderson made false and misleading disclosures concerning Zomax's projected revenue and earnings for the third quarter of 2000 and engaged in insider trading. The Commission's complaint alleged that Anderson sold his entire holdings of Zomax stock in advance of the company's announcement of substantially lower-than-expected revenues and earnings for the quarter, thereby avoiding millions of dollars in losses, as the price of the stock dropped sharply following the announcement.

Without admitting or denying the allegations in the complaint, Anderson consented to the entry of a Final Judgment in which he is permanently enjoined from future violations of Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), and 16(a) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-13, 16a-3 and 16a-8(b)(3)(i) thereunder. The Final Judgment also prohibits Anderson from serving as an officer or director of any publicly traded company. Pursuant to the Final Judgment, Anderson is liable for disgorgement of $6,701,400 plus prejudgment interest of $1,340,280, for a total of $8,041,680. As part of the Final Judgment, any amounts paid by Anderson toward satisfaction of the restitution, forfeiture, and fines totaling $3,427,937.50 that Anderson was ordered to pay in a related criminal proceeding styled as United States v. James T. Anderson et al., Case No. 05-cr-249 (D. Minn.), shall be credited dollar-for-dollar toward the satisfaction of the total monetary judgment in the Commission's case. [SEC v. Zomax, Inc., et al., Civil Action No. 05-cv-01128-JMR-FLN (D. Minn).] (LR-20914)

On February 24, the United States District Court for the Eastern District of Missouri entered a Final Judgment by consent against Defendants Matthew E. Kopsky and Ronald W. Davis, resolving charges of insider trading in the securities of Engineered Support Systems, Inc. (ESSI). The Court's Judgment enjoined Kopsky and Davis from future violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and ordered Kopsky to pay $381,590 in disgorgement and prejudgment interest, and a civil penalty of $276,259, and ordered Davis to pay a civil penalty of $107,062. Kopsky and Davis settled the Commission's claims without admitting or denying the allegations of the Complaint.

The Commission's complaint in this matter was filed on Feb. 26, 2007, and alleged that Davis, ESSI's former President of Business Development, tipped Kopsky, his friend and former broker, prior to each of ESSI's first three quarterly earnings announcements in 2003, and that Kopsky purchased ESSI securities for himself, family members, and clients based upon material, nonpublic information he received from Davis. According to the complaint, Kopsky earned an aggregate profit of $276,259 on these trades, including $107,062 for himself and his wife, and $169,197 for his clients.

As part of the settlement, Kopsky has agreed to a suspension from association with any broker, dealer, or investment adviser, for a period of twelve months, based on the Court's entry of a permanent injunction against him. For further information see (LR-20019). [SEC v. Matthew E. Kopsky and Ronald W. Davis, Case No. 4:07-cv-00379 in the United States District Court for the Eastern District of Missouri] (LR-20915)

INVESTMENT COMPANY ACT RELEASES

Separate Account VL A/IA

An order has been issued under Section 8(f) of the Investment Company Act declaring that Separate Account VL A/IA has ceased to be an investment company. (Rel. IC-28636 - February 25)

SELF-REGULATORY ORGANIZATIONS

Proposed Rule Change

NYSE Arca filed a proposed rule change (SR-NYSEArca-2009-11) pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 to amend Rule 6.69 - Reporting Duties. Publication is expected in the Federal Register during the week of March 2, 2009. (Rel. 34-59440)

Immediate Effectiveness of Proposed Rule Changes

A proposed rule change filed by New York Stock Exchange (SR-NYSE-2009-17) eliminating the ability to enter orders on the Exchange with the settlement instructions of "cash", "next day" and "seller's option" has become effective under Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of March 2, 2009. (Rel. 34-59446)

A proposed rule change filed by the Chicago Board Options Exchange (SR-CBOE-2009-011) related to the Simple Auction Liaison (SAL) has become effective under Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of March 2, 2009. (Rel. 34-59448)